The European Onion

The European Union's Environmental Liability Directive (ELD) presents claims advisors and managers with a new set of adjustment complexities. In a nutshell—if you mess the environment up, you clean it up; if you damage it, you restore it. If only it were that simple.

The ELD was drafted and passed "to establish a common framework for the prevention and remedying of environmental damage at a reasonable cost to society…." To achieve the objective, the ELD sets significant new liabilities for costs, damages and losses for operators and companies that cause damage to the environment, habitats and protected species (biodiversity). It applies across the European Union.

Administratively, the ELD is transposed into the national laws of each EU member state, all of which must meet the minimum requirements of the directive. Some countries have chosen to exceed the minimum requirements—for example, extending the definition of protected species. Because each country is different, any insurance policy proposing coverage for these risks must respond to the specific national law implementing the ELD.

According to the type of operation, liability may be strict—for example, chemical manufacturing operations under EU environmental permits—or fault-based. The rules on strict liability and which operations are included and what is exempt are detailed in Annex III of the directive.

As part of the implementation process, the EU encouraged countries to voluntarily adopt mandatory financial security requirements for companies with strict liability to ensure that they have the means to cope with any damage they create. While the mandates differ based on the scope of covered operators and liabilities, recognized instruments for security in most cases include bonds and insurance.

There are three broad categories of liability: land damage with significant harm to human health; water damage as defined in Directive 2000/60/EC; and biodiversity damage, or harm to protected species and natural habitats.

For the first two liabilities, the EU already has a substantial body of regulation and law, which generally takes precedence over the ELD except where the ELD alone picks up the liability. The last area—damage to biodiversity—is new and includes non-pollution damage, for example, direct fire, flooding or similar damage where the cause of the damage is not within normal insurance definitions of pollution. This is one area where the ELD departs from the United States' Natural Resource Damage Assessment under the Oil Pollution Act of 1990.

For operations that are strictly liable, the ELD creates a range of new responsibilities and liabilities for operators. Where liability is not strict, there remains a fault-based exposure. In this context, and relevant to insurance claims, the definition of operator is broad and includes any person or company that operates or controls the damaging operations. In many countries, this will also include a person that exerts decisive economic control over the technical functioning of the operations.

These responsibilities are broadly stated as (1) a duty to report environmental damage or suspected damage to the appropriate regulator and (2) a duty to prevent damage and take action when there is an imminent threat to the environment.

Where there is an "imminent threat" of environmental damage, operators must immediately take all "practicable" steps to prevent environmental damage and must notify relevant authorities if such actions do not eliminate this threat. If environmental damage has already occurred, further damage must be prevented and the relevant authority notified. Failure to do so or to comply with a remediation notice served by the authority is a criminal offense under the ELD, for which, in addition to the operator, a director or other responsible employee may also be held liable. This has significant implications in relation to "emergency cost" type clauses in insurance policies.

A September 3, 2010, judgment in the European Court of Justice (Italian case C-378/08) clarified that the ELD applies to damages caused by an emission, event or incident taking place after April 30, 2007, where such damage is from activities carried out after that date or were carried out but had not finished before that date. This holds irrespective of when the country actually completed implementation of the ELD into national law.

The court also went on to say that, while causal linkage must be established, fault or intent doesn't have to be. Moreover, the competent authority in the country has discretion to determine how much investigation is actually required to allege causality.

The challenge in any ELD claim is to "return the damaged natural resources and/or impaired services to baseline condition." Based on experience in the U.S., a preferred approach is using Resource Equivalency Methods. This technique brings ecology and economics together; however, it's not an exact science and is still young in terms of application. Just some of the problems for "early" ELD claims include:

This means that significant expertise and professional judgment is needed. In a claims situation, such expertise needs to be brought into play as early as possible by the insurer to ensure that claims for loss and damage remain reasonable and controlled.

The ELD has the potential to significantly raise environmental liability loss costs. The French government produced a study in 2010 entitled La directive « Responsabilité environnementale » et ses méthodes d'équivalence (The ELD and Its Equivalency Methods), which used the EU recommended Resource Equivalency Methods to re-evaluate two incidents from the late 1990s. What was found was a significant spike in regulatory costs under the ELD—in the range of 10 to 40 times the original costs imposed by regulators in the 1990s.

Using the U.S.'s Natural Resource Damage Assessment, we can conclude that, when an incident damages the environment or threatens to, costs quickly can escalate and become more difficult to assess and control compared with a more traditional clean-up response. Such damage is also likely to generate additional third-party claims—for example, from fishing groups affected by an event that pollutes a river, killing fish and threatening the aquatic environment.

In its review of the implementation of the ELD published in October 2010, the EU commented on around 50 cases to date since implementation. Since then, claims activity and values seem to have increased, typically totalling not less than €250,000 ($356,600).

From an insurance perspective, the ELD creates a number of potential gaps in coverage where the existing or current program is limited to the usual general liability form found across Europe. The extent of these gaps will depend on the exact policy wording, specific exclusions, and legal jurisdiction.

A third-party liability policy may not provide any coverage for claims made under regulations by an administrator such as an environment agency, thereby automatically excluding all environmental damage and most clean-up costs. Other gaps exist where the nature of the damage is gradual or an on-site (own-site) loss. While these may be principally clean-up costs, some large sites may have protected habitats within their boundaries.

Claims are and will be complex in this area. Claims managers will need to develop environmental expertise along with knowledge of the Environmental Liability Directive and affiliated national laws across the European Union. It might be time to talk to the risk management side of the house, as well, to make sure clients are properly covered, even retroactively, for their environmental risks in Europe.

Dr. Simon Johnson is director, EMEA, Aon Environmental Services Group.